Regulations May Be Coming For Cryptocurrency ‘Staking’


John Wu, the President of Ava labs, believes that securities regulations for cryptocurrencies utilizing “staking” could be coming in the future. This comes on the heels of Securities and Exchange Commission Gary Gensler signaling that the recent Ethereum “Merge” could lead to securities regulation.[1]

 
So, what exactly is “staking”? Well, in the case of Ethereum’s recent upgrade to “proof-of-stake,” coin holders can now earn Ethereum coins by allocating their own coins to be utilized by the blockchain.[2] In more traditional terms, one may think of staking as being similar to an interest-bearing savings account. In practice, the blockchain is putting your staked coins to work: rather than verifying and securing transactions via a bank or payment processor, it uses the staked coins for this process.
 
In the emerging Non-Fungible-Token (“NFTs”) market, staking is becoming all the more popular. Rather than digress into technical and even philosophical discussions on NFTs, suffice it to say that NFTs are also cryptocurrency tokens secured and verified on various blockchains such as Ethereum and Solana. Out there in what is now referred to as “Web3” to describe the intersection between the internet and blockchain technology, exists a realm where holders of NFTs are staking and receiving cryptocurrencies by the day.[3]  For example, for each “CyberKongz” NFT held, 10$BANANA are yielded per day, for the next 10 years.[4] At one point, 1$BANANA was worth about Ten U.S. Dollars ($10). Thus, for each CyberKongz NFT held, about $100 in rewards were yielded per day. Not a bad deal when you consider that each NFT was minted for only about $15 (and you could have minted multiple NFTs).[5]
 
So, are cryptocurrencies (such as NFT tokens that utilize a staking mechanism) securities or something else? John Wu says that those who stake are “kind of putting labor to work,” thus “it’s a hybrid, so maybe it should be income for work that you contribute, as opposed to a security.”[6] Gensler obviously considers some cryptocurrencies as securities. For now, the markets can only speculate.  
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[1] Lydia Beyoud, SEC Chair Gensler Raises Concerns Over ‘Staking’ Model on Ethereum, Bloomberg (Sept. 15, 2022), https://www.bloomberg.com/news/articles/2022-09-15/gensler-raises-concerns-over-staking-model-used-on-ethereum.

[2] Id.

[3] Not all NFTs require staking. Rather, rewards can also be “airdropped” into all the digital wallets that verify ownership of the relevant NFT.

[4] https://www.cyberkongz.com/ (last visited Sept. 21, 2022).

[5] CyberKongz were minted on March 5, 2021 for 0.01 ETH. https://luckytrader.com/nft/cyberkongz. 0.01 ETH was approximately $15 on March 5, 2021. https://www.coindesk.com/price/ethereum/.  

[6] Ava Labs’s Wu Says Staking Is a ‘Different Construct’ (Correct), Bloomberg (Sept. 22, 2022), https://www.bloomberglaw.com/bloomberglawnews/crypto/BNA%20000001835c42dce6a7d37d73ed7d0001?bna_news_filter=crypto.

 


 

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